Related Articles

If your business sells products or services outside your home state, you need a sales tax policy to ensure you are complying with legal requirements and aren't charging your customers sales tax when it is not necessary. How you operate your business may influence whether you have to charge sales tax in a particular jurisdiction. A sales tax policy ensures you charge the correct amount of sales tax where required.

Sales Tax Concept and Background

States and municipalities may charge sales tax on goods and services sold within their jurisdictional boundaries. Sales taxes are usually applied on most products and some services, with 45 states charging sales tax and 36 of them allowing their counties and municipalities to charge sales tax. States charge sales taxes as a percent of the selling price when their residents make a purchase. When the seller is also located in the state where the purchase takes place, the state requires the seller to collect the sales tax and remit it to the state. When the seller is located outside the state, the state has no control over the seller and the seller doesn't have to collect the tax. If your business sells online or by mail order, your sales tax policy guides you in determining what sales taxes you have to collect.

Physical Presence or Nexus

A key element in your sales tax liability is whether you have a physical presence in a jurisdiction. Sales tax laws refer to this physical presence as a "nexus." States define nexus in various ways. If you use a warehouse in another state, the state may treat that as a nexus and make you liable for state sales taxes on sales to that state's residents. Some states consider it a nexus when an out-of-state business uses in-state residents as affiliates, agents or associates. To avoid legal entanglements, your sales tax policy has to include places where you might have a nexus.

Products and Services

Sales taxes may differ depending on whether you sell products or services. For example, if you sell software, it may be a product if you sell it on a digital video disc and a service if you offer it online with a subscription. The distinction is important, because many services are not taxed, and products and services are often taxed at different rates. Because your customers pay the sales tax as part of your price, your sales tax policy may influence how you offer and deliver your products.

Clear Sales Tax Policies

Your sales tax policy specifies where your business operates and where you have a physical presence that may be considered a nexus. It has to clearly define the situations in which your business charges sales tax. While you can avoid problems by charging the sales tax when there are doubts, you also have to consider the costs of collecting and remitting sales taxes for many different jurisdictions. A good strategy is to focus on being fully compliant in jurisdictions where you have most of your sales and addressing problems with the rest as they come up.

Resources (1)

About the Author

Bert Markgraf is a freelance writer with a strong science and engineering background. He started writing technical papers while working as an engineer in the 1980s. More recently, after starting his own business in IT, he helped organize an online community for which he wrote and edited articles as managing editor, business and economics. He holds a Bachelor of Science degree from McGill University.